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Sabana Shariah Compliant REIT Global largest listed Shariah compliant REIT Market Singapore stock exchange Buy

y Sector Real estate operations Reuters SABA SI (Initiation) Bloomberg SSREIT SP


POEMS Price SBNR SG

Phillip Securities Research Pte Ltd 18 July 2011 Closing Price S$0.935 Target Price S$1.11 (18.7%)

Last Price 52w k High (11/25/2010) 52w k Low (5/13/2011) Shares Outstanding (mil) Market Cap (S$ mil) Avg. Daily Turnover (mil) Free float (%) PE (X) PB (X) Price perform ance % 1M Absolute 1.1% Relative 0.1%
1.1 1.05 1 0.95 0.9 0.85 25-Nov-10
ssr eit sp

0.935 1.05 0.90 634.1171 592.90 1.05 83.52 #N/A N/A 0.94

Trust profile Sabana Shariah Compliant Industrial Real Estate Investment Trust (Sabana REIT) is a Singapore-based REIT with a mandate to invest in income-producing industrial real estate and real estate-related assets in Singapore and Asia with compliance to Shariah investment principles. Sabana REIT is the first fully certified shariah-compliant REIT to adopt Gulf Cooperation Council (GCC) Shariah Compliant standards, and provide access to Islamic equity markets and diverse investor base. Investment merits Revaluation surplus offers potential upside to net asset value per share (NAVPS) and may act as a re-rating catalyst to share price. Freight Links expertise in chemical warehouse & logistics give them an edge over its peers. Triple net master lease structures provide some form of security as the rental income is locked-in and likely to be stable and visible for the next three years. The adoption of GCC standards Shariah compliance provides additional access to Islamic equity market that is untapped by Shariah compliant REITs listed in Malaysia. Ample debt headroom leaves Sabana REIT in good position to take advantage of acquisition growth.

3M 0.0% 2.2%

6M -7.4% -2.4%

STI ( r ebased)

25-M ar-11

Potential risks Renewal of master leases in 2013 may pose a challenge to the management as 60% of the master leases based on the gross revenue will be expired in 2013.
% 7.48 4.69 4.31

Major Shareholders 1 Freight Links Express Holdings 2 Moore Capital Management LP 3 Al-Salam Bank-Bahrain BSC

Listing of more Islamic REITs may compete with Sabana REIT. This may turn on the battle for the flow of funds from the Islamic equity market. Uncertainties in global economies could moderate Singapore economic growth. Manufacturing sector may experience a tepid expansion compared to last year.

Analyst Travis Seah 65 6531 1229 FAX 65 6536 4435 travisseahhk@phillip.com.sg Web: www.poems.com.sg MICA (P) 004/01/2011 Ref No: SG2011_0199

Valuation In view of the short land tenure for industrial properties, we ascribe a 9.5% discount rate to Sabana REIT. We initiate coverage on Sabana REIT with a fair value of $1.11, representing a potential upside of ~29% with the inclusion of FY11 dividend yield of 10%. The revaluation of properties this year is expected to increase owing to the buoyant industrial property market. We therefore opine that an increase in book value may act as a re-rating catalyst to the share price. With Sabana REIT set forth to cross $1 billion portfolio by the year end, further upsides are expected in the 2H 2011 to drive up the share price. Future acquisition is not priced into the model. Conso' Profits EPS DPU BV ROE P/E Yield P/BV Ending (SGM) (SG cents) cents) (SG) (SG (%) (X) (%) (x) 12/11 E 52.0 8.19 9.35 1.02 8.03% 11.41 10.00% 0.92 12/12 E 47.7 7.50 8.63 1.01 7.42% 12.46 9.23% 0.93 12/13 E 47.1 7.41 8.54 1.00 7.37% 12.61 9.13% 0.93

Sabana Shariah Compliant REIT


Investment merits

18 July 2011
Revaluation surplus offers potential upside to net asset value per share (NAVPS) and may act as a re-rating catalyst to share price. Recent high bids saw in the public tenders and a rebound in URA industrial property price index points toward a higher property valuation gain at the end of FY2011. Freight Links expertise in chemical warehouse & logistics give them an edge over its peers. Jurong Island, an established petrochemical hub, which is undergoing a second phase of growth, will open up opportunity to Sabana REIT to capitalize its growth potential in chemical logistics space due to the high demand from major oil and chemicals players. Triple net master lease structures provide some form of security as the rental income is locked-in and likely to be stable and visible for the next three years. Default risk is deemed to be low as the Singapore economy continued to be fueled by manufacturing sector which is a bellwether to gauge the consumption of industrial space. The adoption of GCC standards Shariah compliance provides additional access to Islamic equity market that is untapped by Shariah compliant REITs listed in Malaysia. The cornerstone investors such as Al Salam Bank-Bahrain BSC and Capital Investment and Brokerage/Jordan Limited Company underline Sabana REITs ability to entice investors from Middle Eastern countries. Sabana REIT was included in MSCI Global Small-Cap Indices on 31 May 2011. This may rekindle interest not only to Middle East and conventional investors but also to a wider pool of institutional funds and investors around the globe of who are seeking stable investment returns. Ample debt headroom leaves Sabana REIT in good position to take advantage of acquisition growth. Approximately $123 million of loan can be leveraged before reaching 34% gearing. With the credit rating expected to be issued by this year, Sabana REIT can gear up to $230m million based on a comfortable gearing of 40%. Post-acquisition will give rise to distribution per unit (DPU) growth. Potential risks Renewal of master leases in 2013 may pose a challenge to the management as 60% of the master leases based on the gross revenue will be expired in 2013. In the worst-case scenario, none of the master leases will be renewed. The management will be given a six-month grace period to gradually takeover from the master lessees before the leases matured. The occupancy rate between the master lessee and sub-tenants is not at 100%. Portfolio occupancy may fall when the management takes direct control from the master lessees if vacancy has yet to improve by then. Proactive leasing and new acquisitions engaged by the management will spread out the renewal risk and lengthen the weighted average master lease duration prior to 2013. Listing of more Islamic REITs may compete with Sabana REIT. This may turn on the battle for the flow of funds from the Islamic equity market. The management welcomes the competition as it will raise the industry standards. The listing of more Islamic REITs can be beneficial to Sabana REIT as a more established industry would help dispel investors unfamiliarity and subsequent hesitation. Uncertainties in global economies could moderate Singapore economic growth. Manufacturing sector remains as one of the key pillars of economy, may experience a tepid expansion compared to last year if the US economy sees a slowdown in recovery and Asian countries step on the brake to curb inflation through monetary tightening.

Sabana Shariah Compliant REIT

18 July 2011
Trust profile Sabana Shariah Compliant Industrial Real Estate Investment Trust (Sabana REIT) is a Singapore-based REIT with a mandate to invest in income-producing industrial real estate and real estate-related assets in Singapore and Asia with compliance to Shariah investment principles. Sabana REIT is the first fully certified shariah-compliant REIT to adopt Gulf Cooperation Council (GCC) Shariah Compliant standards, and provide access to Islamic equity markets and diverse investor base. The initial portfolio comprises 15 industrial properties ranging from hi-tech industrials, chemical warehouses to general industrials, with an aggregate gross floor area (GFA) of 3.28 million sq ft. Figure 1: Structure of Sabana REIT

The manager Sabana Real Estate Investment Management Pte. Ltd. is the manager of Sabana REIT. The manager has general powers of management over the assets of Sabana REIT. The managers main responsibility is to manage Sabana REITs assets and liabilities for the benefit of Unitholders. The manager will set the strategic direction of Sabana REIT and give recommendations to the Trustee on the acquisition, divestment and/or enhancement of assets of Sabana REIT in accordance with its stated investment policy. The property manager Sabana Property Management Pte. Ltd. is the dedicated property manager of Sabana REIT. The property manager is responsible for providing property, management, lease management, marketing and administration of property tax services for the properties in Sabana REITs portfolio. The trustee HSBC Institutional Trust Services (Singapore) Limited is the trustee of Sabana REIT. The trustee will hold the assets of Sabana REIT on trust for the benefit of the unitholders in accordance with the Trust Deed. The Independent Shariah Committee The Independent Shariah Committee is an external committee appointed by the manager through the Shariah Adviser, comprising independent Shariah scholars whose role is to advise the manager on Sabana REITs Shariah compliance and issue the Shariah Guidelines and Shariah Certification. The Sponsor The Freight Links group of companies is the third largest international total logistics solution providers in Singapore by total assets. The Freight Links Group provides a comprehensive array of logistics services, and has extensive experience in storing and forwarding all types of cargo. Freight Links was upgraded to the Main Board of the SGX-ST in 1998 and has a market capitalisation of S$137.8 million as at the 15 July 2011. Source: Sabana REIT, Phillip Securities Research

Sabana Shariah Compliant REIT


Appreciation of Shariah compliance

18 July 2011
Figure 2 provides a snapshot on the differences between the conventional and Shariah compliant REIT. In a nutshell, Shariah compliant REIT is more stringent than the conventional counterpart in terms of constraints on properties owned and must be in line with the Shariah principles. From another viewpoint, Shariah compliance is actually more conservative and risk-adverse in nature. Figure 2: Main distinctions between Shariah compliant REIT and conventional REIT

Source: Sabana REIT, Phillip Securities Research Demystify the concerns of Shariah compliance Is Shariah compliance status costly to maintain? Excluding the inception fee, annual compliance expenses will be between US$45,000 and US$120,000 per annum. In addition, Shariah advisor shall also be reimbursed for all reasonable costs and out-of-pocket expenses incurred. This includes the travel and accommodation costs and other expenses pertaining to roadshows and seminars. The compliance costs are negligible to DPU. Is the leakage forming a substantial part of distributable income? Sabana REIT adopted a Shariah compliance policy that adhered to GCC standards. One of the regulations is that Sabana REIT cannot receive more than 5% of non-Shariah income. The incomes generated from non-core and non-permissible activities have to be cleansed via donation. In accordance to 1Q 2011 result briefing, merely 0.2% of net property income is nonShariah compliant. The impact to DPU is therefore insignificant.

Sabana Shariah Compliant REIT


Macroeconomic Overview: Industrial Property Sector

18 July 2011
Manufacturing industry continued to drive the growth Economic growth has normalized to 8.3% YoY in 1Q 2011, after posting a robust expansion of 14.5% in 2010. Manufacturing industry led the pack by registering 13.1% YoY growth, excluding other service industries (14.5%) which were boosted by the two integrated resorts. Biomedical manufacturing and electronic clusters were the two key drivers that underpinned the manufacturing industry in 1Q 2011. Wholesale & retail trade and transport & storage industries, which have a sequential effect on the demand of industrial spaces, also grew 4.5% and 4.9% respectively in 1Q 2011. Figure 3: Singapore GDP growth
% 50 40 30 20 10 8.3 0 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 -10 -20 GDP: 2005p: YoY% GDP: 2005p: CL: sa: Annualised QoQ% 1Q11 22.5

Source: CEIC, Phillip Securities Research Figure 4: Singapore GDP growth by selected industry
% 50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25 -30

13.1 4.9 4.5 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11

GDP: 2005p: CL: GPI: Manufacturing GDP: 2005p: CL: SPI: Wholesale and Retail Trade GDP: 2005p: CL: SPI: Transport & Storage

Source: CEIC, Phillip Securities Research

Sabana Shariah Compliant REIT

18 July 2011
Singapore's non-oil domestic exports (NODXs) increased 7.5% MoM seasonally adjusted (sa) in May, a reversal of -3.7% in April. While industrial output fell for two consecutive months in a row to -17.5% YoY, down from -9.5% in the April. It was dragged down by the volatility in pharmaceutical production as export demand declined. Excluding erratic biomedical cluster, manufacturing indeed grew 2.3% YoY. Figure 5: Industrial output YoY and non-oil domestic export MoM seasonally adjusted
20.0 15.0 10.0 5.0 0.0 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 -17.5 -15.0
Non-Oil Domestic Exports: sa: MoM%

70.0 60.0 50.0

7.5 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0 -30.0


Industrial Production Index (IPI) YoY% change

-5.0 -10.0

Source: CEIC, Phillip Securities Research Purchasing Managers Index (PMI): Manufacturing new orders, a leading indicator for manufacturing economy, fell to a reading of 50.9 in May, from 53.9 in April. While PMI manufacturings electronic new orders also slipped in May to 51.9. The dip in reading was weighed down by lower new order against the backdrop of weak overall demand from domestic and overseas markets. It points toward a slowdown to the manufacturing economy going forward. Figure 6: Purchasing Manager Index*: Manufacturing and electronic new orders
Index 60.0 58.0 56.0 54.0 52.0 50.0 48.0 46.0 44.0 42.0 40.0 Nov-10 Jun-10 Oct-10 Jan-11 Jul-10 Feb-11 Apr-11 May-10 May-11 Aug-10 Sep-10 Dec-10 Mar-11 50.9 51.9

Purchasing Manager Index: Mfg: New Orders Purchasing Manager Index: Mfg: Electronics: New Orders

* A reading of the Singapore Purchasing Managers Index above 50 indicates that the manufacturing economy is generally expanding and that the economy is generally declining when the reading falls below 50.

Source: CEIC, Phillip Securities Research

Sabana Shariah Compliant REIT

18 July 2011
Business expectations in the manufacturing, wholesale & retail trade and transport & storage sectors are anticipated to remain positive for the period April to September 2011. First quarter net weighted balance in manufacturing (+12) and wholesale & retail trade (+15) sectors are relatively lower than the fourth quarter of 2010. While net weighted balance in transport & storage sector improved to +5, a reversal from -3 in 4Q 2010. On a whole, business owners from the abovementioned sectors expect a favorable business situation but less optimistic than a year ago due to the uncertainties in global economies. Table 1: General business expectations* by selected industry Business Expectations 1Q 10 2Q 10 3Q 10 4Q 10 Manufacturing Wholesale & Retail Trade Transport & Storage +29 +37 +24 +18 +36 +24 +3 +37 +22 +20 +18 -3

1Q 11 +12 +15 +5

* Figures refer to the net balance of firms in percentage terms. A plus sign indicates a positive balance or net upward trend and a minus sign denotes a negative or net down trend for the next six months.

Source: MTI, Phillip Securities Research Headwinds may diminish the prospect in manufacturing industry but remains positive Forward-looking indicators such as PMI and business expectations by selected industry associated with industrial property market are holding up year-to-date (Ytd) but the outlook is much lower than the preceding quarters. 1. There are signs that the US economy is engaging a slowdown on the recovery track due to grim economic data. 2. Heading eastwardly, longstanding European sovereign debt problems have yet to be fully resolved and the exercise of protracted austerity in some of the ailing European economies may have post effect on global trades. 3. Moving down south, political turmoil in Middle East and North Africa has put upward pressure on oil prices. 4. Closer to home, supply chain disruption caused by the bad weather in Japan and tightening of monetary policies across the Asian countries with the aim to curb inflation has collectively sent the global financial markets into a tailspin in June. On the bright side, this slowdown is not an exception for Singapore for being a trade dependent on external economies. NODXs MoM sa has turnaround in May after declining for two consecutive months while industrial output took a beating due to a decline in biomedical output. Singapore economy was not spared from the slowdown (in a year of moderation). With the US starting to look up and China hard landing an outlying probability, we do think the pace of global growth will likely quicken 2H11. Foreign direct investment such as German chemicals company Lanxess to invest $350 million in Jurong rubber plant and Nasdaq-listed Bruker which had opened a $6 million centre of excellence at Biopolis in May 2011 as a regional headquarter are some testaments to the attractiveness of Singapore industrial landscape that appeal to foreign companies to establish a foothold here. With NODXs upgraded to 8-10% this year, up from the previous estimate of 6-8% as well as upward revision of the GDP growth forecast for 2011 from 4-6% to 5-7%, we opine that the demand for industrial spaces is likely to sustain for the next few years given that the economic growth is able to sustain at 4-5% a year going forward.

Sabana Shariah Compliant REIT


Property Market Overview: Industrial Sector

18 July 2011
Sabana REITs portfolio properties include various types of industrial buildings. This section will focus on the specific private industrial markets that aligned with the portfolio. We first examine the general private factory market followed by specific private industrial types. Industrial sector poised to gain on the back of strong economic fundamentals. Singapore macroeconomic data looks healthy with manufacturing sector remains bulwark of economy despite global uncertainties. Private factory net absorption of 2.8 million sq ft outpaced net supply of 1.8 million sq ft in 1Q 2011 and resulted in higher occupancy. Occupancy rate for private factory classified into multiple-user factory, single-user factory and Business Park has therefore crept up modestly by 0.4%-pt to 92.1% in 1Q 2011, compared to a sharp rise of 1.1%-pts in 4Q 2010. Averaged 10.1 million sq ft of private factory supply stream per year will be added to the factory stockpile between 2011 and 2012. This is slightly below the 5-year annual average demand of 10.2 million sq ft. With steady supply coming on-stream in the next two years, private factory rents are expected to rise at a moderate pace. Figure 7: Annual net supply, net absorption and occupancy of private factory space
25,000 20,000 15,000 10,000 5,000 0 1Q11
>2015

000 sq ft

5yr average annual demand (2006-2010)

93 92 91 90 89 88 87 86 85

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
2015

Annual net supply

Annual net absorption

Source: URA, Phillip Securities Research Figure 8: Private factory pipeline by development status
000 sq ft 12,000 10,000 8,000 6,000 4,000 2,000 0 2011 2012 2013
Planned

2014

Under Construction

Completed

Source: URA, Phillip Securities Research Private multiple-user factory Private multiple-user factory, a subset of private factory, also seemed a slight improvement (0.3%-pt) in occupancy. Property price index of multiple-user factory has bounced back strongly by 36.4% from the bottom in 3Q 2009 to 123.6 in 1Q 2011. It surpassed the last peak of 114.9 in 3Q 2008. Development charge (DC) rate, a benchmark used to measure the tax on the enhancement in land value rose 8.3% for industrial group in March 2011, further reinforced capital escalation on industrial properties. This price uptrend is expected to continue as policy concerns within the residential sector could divert some investors interest to the industrial sector in search of higher investment return.

2010

Occupancy

Sabana Shariah Compliant REIT

18 July 2011
Figure 9: Annual net supply, net absorption and occupancy of private multiple-user factory space
10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 Annual net supply Annual net absorption Occupancy 1Q11
%

000 sq ft 5yr average annual demand (2006-2010)

92 90 88 86 84 82 80

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

78 76 74

Source: URA, Phillip Securities Research Figure 10: Price index, rental index and occupancy of private multiple-user factory
140 120 100 80 60 40 20 0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Occupancy Rate of Multiple-user Factory Space (Private Sector) in Whole Island Rental Index of Multiple-user Factory Property Price Index of Multiple-user Factory Index 92 90 88 86 84 82 80 78 76

Source: URA, Phillip Securities Research Figure 11: Rental index of private multiple-user Figure 12: Price index of private multiple-user factory and QoQ % change factory and QoQ % change
140 120 100 80 60 40 20 0 Index % 15.0 10.0 5.0 0.0 -5.0 -10.0 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 140 120 100 80 60 40 20 0 Index % 10.0 5.0 0.0 -5.0 -10.0 -15.0 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11
Property Price Index of Multiple-user Factory (LHS) QoQ % change (RHS)

Rental Index of Multiple-user Factory (LHS) QoQ % change (RHS)

Source: URA, Phillip Securities Research

Sabana Shariah Compliant REIT


Table 2: Development charge for industrial group Use Groups Sep09 Mar10 $ average per square metre of gross floor area Industrial $567 $567 % average per change over the previous revision Industrial 0.0 0.0 Source: URA, Phillip Securities Research Sep10 $624 9.9

18 July 2011
Mar11 $675 8.3

Property price index of multiple-user factory is more sensitive and reacted responsively to the change in market direction than the rental index. Akin to the price index, the rental index bottomed out in 3Q 2009 and have since rebounded by 21.5% to 117.7 but still trailing behind the price index. Rental index, a laggard, will then play catch up with the price index and close up the gap in the subsequent quarters. Rental upside has more potential for growth relative to the price appreciation however the increase will be gradual due to impending private factory supply in the next two years. Table 3: Major upcoming industrial projects Name of development Est. GFA (sq ft) CleanTech One 343,400 UB. One 309,200 West Park BizCentral 1,414,600 Woodlands BizHub 400,500 UE Biz Hub East 510,400 Changi City 766,000 North Point Bizhub 383,300 Source: URA, Phillip Securities Research Private warehouse The average occupancy for private warehouse registered 92.8% in 1Q 2011, which was in line with the last peak in 3Q 2008. Likewise to multiple-user factory, property price index of multiple-user warehouse is more susceptible to the property cycle than the rental index. Multiple-user warehouse price index has recovered to 120.5 and surpassed the last peak of 115.6 in 3Q 2008. Nevertheless, rental index of multiple-user warehouse (96.2) in 1Q 2011 has yet to cross the previous high of 101. With average past 5-year annual demand of 2.9 million sq ft exceeding the annual pipeline supply in the next three years, warehouse capital and rental value are anticipated to grow at a faster pace. Figure 13: Annual net supply, net absorption and occupancy of private warehouse space
6,000 5,000 4,000 3,000 2,000 1,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q11 -1,000 Annual net supply Annual net absorption 80.0 Occupancy 000 sq ft 5yr average annual demand 2006-2010 % 94.0 92.0 90.0 88.0 86.0 84.0 82.0

Est. TOP year 2011 2011 2011 2011 2012 2012 2012

Source: URA, Phillip Securities Research

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Sabana Shariah Compliant REIT


Index %

18 July 2011
Figure 14: Price index, rental index and occupancy of private multiple-user warehouse
140 120 100 80 88 60 40 20 0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 Occupancy Rate of Warehouse Space (Private Sector) in Whole Island Rental Index of Multiple-user Warehouse Property Price Index of Multiple-user Warehouse 86 84 82 94 92 90

Source: URA, Phillip Securities Research Figure 15: Private warehouse pipeline by development status
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2011 2012 2013 2014
Planned

2015

>2015
Completed

Under Construction

Source: URA, Phillip Securities Research Figure 16: Rental index of private multiple-user Figure 17: Price index of private multiple-user warehouse and QoQ % change warehouse and QoQ % change
120 100 80 60 40 20 0 Index % 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 140 120 100 80 60 40 20 0 Index % 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 Property Price Index of Multiple-user Warehouse (LHS) QoQ % change (RHS)

Source: URA, Phillip Securities Research

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 Rental Index of Multiple-user Warehouse (LHS) QoQ % change (RHS)

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Sabana Shariah Compliant REIT


Hi-tech industrial

18 July 2011
For the first quarter of 2011, demand for business park space gained traction from last year with net absorption about twice of net supply. As a result, occupancy inched up 3.0%-pts to 74%. Figure 18: Annual net supply, net absorption and occupancy of private business park space
2500 2000 1500 1000 500 0 2003 -500 Annual net supply Annual net absorption 2004 2005 2006 2007 2008 2009 2010 1Q11 000 sq ft % 100 90 80 70 60 50 40 30 20 10 0 Occupancy

Source: URA, Phillip Securities Research Business park space rent which includes science park will be used as a proxy to analyze the rental trend for hi-tech space as the hi-techs specifications are quite comparable in some extent to the business park. Median business park rent rose 5.6% to $3.80 per sq ft per month in 1Q 2011, higher than 1.2% increase in the previous quarter. Office rents are somewhat correlated to business park and hi-tech rents especially when the rental gap between them drifted apart arising from the relocation of back office outside the city centre as a cheaper substitute. Office rents in central area rose significantly for the past three quarters since 2Q 2010. If this growing trajectory is to persist, business park and hi-tech rents could benefit from the office occupants who are sourcing for alternative spaces to ease the hefty occupancy costs. Figure 19: Median business park rents and private office rents in central area
$ per sq ft per month 12 10 8 6 4 2 0 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Business Park rents

Private office rents in central area

Source: URA, Phillip Securities Research

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Sabana Shariah Compliant REIT

18 July 2011
However, business park rents could feel the brunt as the occupancy was still at mid-70% and the upcoming business park developments such as CleanTech One, UE Biz Hub East and Changi City are expected to come on-stream within the next two years. On the other hand, the URAs decentralization strategy to make workplace closer to heartlanders and reduce the traffic congestion in Central Business District area, has initiated the authority to map out Jurong Lake District and Paya Lebar Central as the two regional commercial hubs outside the city centre. With the establishment of decentralized offices at the emerging commercial hubs and further development of specialized parks such as Biopolis, Funsionopolis, CleanTech Park and proposed Data Center Park will weigh on the business park and hi-tech rents. Property industry players are confident with the industrial sector The Real Estate Sentiment Index (RESI) report is a quarterly survey conducted jointly by Real Estate Developers Association of Singapore (REDAS) and National University of Singapore (NUS) to specifically gauge the confidence of senior executives in the Singapore real estate and development industry. The survey measures respondents perceptions and expectations of current (between now and in the past 6 months) and future (the next six months) real estate market conditions. For the overall real estate market performance section, net balances* of the future performances of business park/high tech space (+30 in 4Q 2010, +52 in 1Q 2011) and industrial/logistics market sectors (+31 in 4Q 2010, +48 in 1Q 2011) increased significantly in 1Q 2011 compared to the previous quarter. This indicates that the industry players are generally sanguine on the outlook for business park/high tech space and industrial/logistics market sectors for the period between April and September. Figure 20: RESI 4Q 2010 Overall real estate market performance*
Hotel / Serviced Apartment Industrial / Logistics Business Park / Hi-tech Space Suburban Retail Prime Retail -4 Suburban Residential Prime Residential Office -10 Current 0 10 20 30 40 50 Future 60 70 21 24 22 53 44 72 76 80 31 40 30 33 32 43 59 65

*A net balance percentage is used to indicate the overall direction of change in sentiment. This is the difference between the proportion of respondents who have selected the positive options (better and increase) and the proportion of respondents who have selected the negative options (worse and decease). A + sign in the scores denotes a net positive sentiment (optimism) and a -sign indicates a net negative sentiment (pessimism). The derived net balance scores are not weighted by the size of the respondents business.

Source: Redas, NUS, Phillip Securities Research

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Sabana Shariah Compliant REIT


Figure 21: RESI 1Q 2011 Overall real estate market performance
Hotel / Serviced Apartment Industrial / Logistics Business Park / Hi-tech Space Suburban Retail Prime Retail -16 Suburban Residential Prime Residential Office -30 -20 -10 Current 0 10 20 30 40 50 Future 60 1 6 15 62 77 70 80 22 18 30 32 48 55 52 57 58 68

18 July 2011

Source: Redas, NUS, Phillip Securities Research For the 1H 2011Government Land Sales (GLS) Programme, developers and REIT managers were aggressive during the public industrial land tenders. For instance, Kaki Bukit Road 4 site which is zoned for business 2 uses was hotly contested with a total of eighteen bidders. On the other hand, business park land parcel which is zoned as a white site with 40% allocated for office uses had attracted seven bidders with the top bid 29.1% higher than second highest bid. This further suggests that the industrial developers and REIT counterparts are upbeat on the industrial property sector against the backdrop of broad-based economic performance in 1Q 2011 as well as less exposed to policy changes. Table 4: Industrial GLS sites awarded year to date

Location

Site area Zoning (sq ft) 300,900 264,900 133,500 67,800 36,100 221,700 46,900

Lease

Ang Mo Kio Street 62 Kaki Bukit Road 4 Ubi Raod 1 / Ubi Ave 4 Fusionopolis Link Irving Place Woodlands Avenue 12 (Parcel 2)* Tuas View Square*

(Gross plot ratio) (years) B1(2.5) 60 B2 (1.0) 30 B1 (2.5) 60 BP-W (4.0) 60 B1-W (3.5) 60 B1 (2.5) 60 B2 (0.9) 45

Price per sq ft per gross plot ratio (no. of bids/tenders) $170.30 (13) $156.90 (18) $216.80 (6) $408.60 (7) $343.50 (15) $152.00 (9) $173.9 (6)

Successful tenderer

Sim Lian Development Pte Ltd Soon Hock Realty Pte. Ltd. Oxley Asced Realty Pte Ltd Ascendas REIT

Oxley Vista Pte. Ltd


OKH Development Pte Ltd SCB Terraform Pte Ltd

*Bids were submitted but still pending approval

Source: URA, JTC, Phillip Securities Research

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Sabana Shariah Compliant REIT


Portfolio Properties

18 July 2011
Sabana REITs property portfolio can be segregated into 4 property types, namely, hi-tech industrial, chemical warehouse & logistics, warehouse & logistics and general industrial. The various property types can be largely catered to a diverse group of end-users. Sub-tenant proportion is therefore consisted of a wide spectrum of trade sectors ranging from chemical (11.4%), electronics (17.6%) to telecommunication and data warehousing (19.5%). Its portfolio is highly concentrated in hi-tech industrial and warehouse & logistics in terms of gross floor area and gross revenue. To some extent, the diversification of trade sectors can mitigate the economic restructuring risk especially when some industrial trade sectors are being phased out due to comparative advantage factor in relation to the neighboring countries. Being less reliance on a particular sector also helped to buffer the default risk as the sources of rental are collected from multiple trade sectors. Of the 15 portfolio properties, 14 are under master lease structure and one is on multitenanted lease (9 Tai Seng Drive). Stripped out the 9 Tai Seng Drive which is not on a triple net master lease, the bulk of 60% lease based on gross revenue is slated to expire in 2013 and the remainder in 2015. There could be a probability that the master lessees may not renew upon lease expiry. With new acquisitions anticipated in 2H 2011, the renewal risk would be spread across over more years and lengthen the weighted average master lease duration. Sponsor has granted the right of first refusal (ROFR) for the three properties to Sabana REIT. However, the remaining land leasehold is short and is not practical for near term acquisition. Additional investments are needed to redevelop these properties before JTC would extend the lease.

Table 5: Sabana REITs Property Portfolio Remaining Land Monthly Average Gross Floor Leasehold Purchase Price % of Total Rental psf Independent Property Type Property Area (sq ft) Tenure (years) (S$'million) Purchase (S$) Valuation 151 Lorong Chuan 810,710 45 305.9 35.9 2.47 305.9 8 Commonwealth Lane 161,475 48 70.3 8.3 2.80 70.5 High-tech 9 Tai Seng Drive 218,905 45 46.3 5.4 1.39 46.3 Industrial 200 Pandan Loop 180,186 72 41.5 4.9 1.48 41.5 15 Jalan Kilang Barat 73,928 50 34.5 4.1 2.87 34.5 33 & 35 Penjuru Lane 286,192 38 78.9 9.3 1.79 78.9 Chemical 132,878 28 34.1 4 1.71 34.1 Warehouses & 18 Gul Drive 1 Tuas Avenue 4 160,361 37 28.0 3.3 1.11 28.0 Logistics 34 Penjuru Lane 414,270 22 60.0 7 1.01 60.0 51 Penjuru Road 246,376 44 42.5 5 1.12 42.5 Warehosue & 26 Loyang Drive 149,166 43 32.0 3.8 1.37 32.0 Logistics 3 Kallang Way 2A 83,646 45 15.0 1.8 1.16 15.0 218 Pandan Loop 50,374 39 13.5 1.6 1.74 13.5 123 Genting Lane 158,907 31 24.5 2.8 1.02 24.5 General 30 & 32 Tuas Ave 8 158,846 46 24.0 2.8 1.00 24.0 Industrial Total/Weighted average* 3,286,220 40.9 851.0 100 851.2
*Based on GFA as at 31 March 2011

Source: Sabana REIT, Phillip Securities Research

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Sabana Shariah Compliant REIT


Figure 22: Breakdown of sub-tenant base as at 31 March 2011
Chemical Electronics

18 July 2011

19.5%

11.4%

Engineering Food & beverage

17.6% 6.3% 3.5% 8.7% 15.7% 2.9% 3.5% 4.0% 6.9%

Healthcare Information technology Logistics Others Research & Development Storage Telecommunication and data warehousing

Source: Sabana REIT, Phillip Securities Research Figure 23: Property asset by gross revenue as at IPO
General Industrial 10% High-tech Industrial 43%

Warehosue & Logistics 29%

Chemical Warehouses & Logistics 18%

Source: Sabana REIT, Phillip Securities Research Figure 24: Property asset by gross revenue as at IPO
General Industrial 6% Warehosue & Logistics 19%

High-tech Industrial 59%

Chemical Warehouses & Logistics 16%

Source: Sabana REIT, Phillip Securities Research

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Sabana Shariah Compliant REIT


Figure 25: Weighted average master lease to maturity as at 31 March 2011*
70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2011 2012 2013 2014 2015

18 July 2011

Lease expiry profile by gross revenue *Excludes 9 Tai Seng Drive which is not on a triple net master leases.

Source: Sabana REIT, Phillip Securities Research Table 6: Sponsors properties that are subject to the right of first refusal
Remaining Land Leasehold GFA (sq ft) Tenure (years)* Completion date 16 Jun-09

Property

Location Description

30 Tuas Avenue 10, Singapore 639150 Singapore

A seven-storey warehouse complex 340,339 with ancillary offices

146 Gul Circle, Singapore 629604

Two single-storey detacted warehouses and a single-storey Singapore warehouse with a two-storey ancillary office

85,263

August 1992 for Blocks A and B; November 1992 for Block C

29 Tanjong Penjuru, Singapore 609026 Singapore

A single-storey detached warehouse 36,770 with a mezzanine office level

Sep-92

*As at 30 September 2010

Source: Sabana REIT, Phillip Securities Research

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Sabana Shariah Compliant REIT

18 July 2011
Quality of properties and niche sector count towards Sabana REITs winning formula All the fifteen industrial properties are strategically situated across island. Most of them plied along the major transport networks and public transportation nodes, well served by the underground power transmission grids (suitable for data centers that required high power supply) and are in close proximity to air- and sea- port terminals. These properties will be further examined within the four clusters, namely, 1. Hi-tech industrial cluster, 2. Chemical warehouse & logistics cluster, 3. Warehouse & logistics cluster and 4. General industrial cluster. Figure 26: Location of portfolio properties

Source: Sabana REIT, Phillip Research Securities Figure 27: Power transmission grid Hi-tech cluster Some industries such as media and entertainment, information communication, research & development and among others preferred to house their offices and operations in hi-tech buildings, which are usually located near the city fringe. For instance, HBO and ESPN Star Sports, which have established their infrastructures at 151 Lorong Chuan (New Tech Park), are unlikely to move out from the premises in the near term. Nevertheless, upcoming specialized parks such as the Mediapolis @ One-North which is touted as digital media hub will have the capacity to attract media industry players across the value chain. Local broadcaster, MediaCorp, will be moving from Caldecott Hill to Mediapolis @ One-North by 2015. Anticipation of greater synergies and possible cost benefits could be the pull factors to relocate. Infocomm Development Authority of Singapore (IDA) has earmarked to establish a proposed data center (DC) park which may consist of six DC buildings and take up to 12 hectares. The DC park is devised to bring in world-class internet and media companies to host their content and services here. Telecommunication and data warehousing which made up 19.5% of Sabana REITs sub-tenants base may feel the heats from the proposed development. Relocation of sub-tenants however looks slim as the shifting of data servers which are used to store and process critical information, may disrupt outsourcing clients and end-users operation without proper relocation plan. On the bright side, demand for data center is likely to grow significantly over the next few years when cloud computing is set to take off in Singapore. The establishment of dedicated DC park could have some spillover effect in enticing more telecommunication companies to set up their base here to capture a foothold in Singapore that provided the supporting infrastructure.

Source: Singapore Power Grid

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Sabana Shariah Compliant REIT


Figure 28: 151 Lorong Chuan Tenancy: Master lease Type: High-tech Industrial GFA: 810,710 sq ft NLA: 605,499 sq ft Value: S$305.9m Est. initial net property income (NPI) yield: 7.8% Tenants: 33 sub-tenants Source: Sabana REIT, Phillip Securities Research Source: Sabana REIT Figure 29: 8 Commonwealth Lane Tenancy: Master lease Type: High-tech Industrial GFA: 161,815 sq ft NLA: 141,179 sq ft Value: S$70.5m Est. initial net property income (NPI) yield: 7.7% Tenants: 1 sub-tenants Source: Sabana REIT, Phillip Securities Research Source: Sabana REIT Figure 30: 9 Tai Seng Drive Tenancy: Multi-tenanted lease Type: High-tech Industrial GFA: 218,905 sq ft NLA: 176,535 sq ft Value: S$46.3m Est. initial net property income (NPI) yield: 7.9% Tenants: 9 tenants Source: Sabana REIT, Phillip Securities Research Source: Sabana REIT Figure 31: 200 Pandan Loop Tenancy: Master lease Type: High-tech Industrial GFA: 190,186 sq ft NLA: 139,033 sq ft Value: S$41.5m Est. initial net property income (NPI) yield: 7.7% Tenants: 12 sub-tenants Source: Sabana REIT, Phillip Securities Research

18 July 2011

Source: Sabana REIT Figure 32: 15 Jalan Kilang Barat Tenancy: Master lease Type: High-tech Industrial GFA: 73,928 sq ft NLA: 58,543 sq ft Value: S$34.5m Est. initial net property income (NPI) yield: 7.5% Tenants: 19 sub-tenants Source: Sabana REIT, Phillip Securities Research

Source: Sabana REIT

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Sabana Shariah Compliant REIT

18 July 2011
Chemical warehouse & logistics cluster All the three chemical warehouse & logistics are located in the west region, strategically closed to Jurong Island (a world-class energy chemical hub), major transportation and transshipment nodes such as second link bridge and port terminals. With facilities such as very narrow aisle (VNA) warehouse module being installed at one of the properties, which is very attractive for chemical logistic operations, the likelihood of sub-tenant to continue their business operation in the existing premises is very high. Road works along Pioneer Road and Tuas Avenue 4 in connection with the Tuas West Mass Rapid Transit (MRT) extension has brought about compulsory acquisition to a small parcel of land where one of the chemical warehouses at 1 Tuas Avenue 4 was located. An announcement dated on 19 January 2011, the management did not see any impact on the rental payable by the lessee of the property affected by the compulsory acquisition. Moving forward, Singapore is embarking on Jurong Island version 2.0 that will create new game-changing differentiating advantages to drive the next phase of growth to the industry. For instance, Shell has started up its largest integrated oil and petrochemicals cracker in May 2010. Coupled with the ExxonMobil cracker to join in the bandwagon in 2011, these two projects will double Singapore's ethylene capacity to 4 million tonnes per annum by 2012 which will help catalyze a new wave of high value downstream investments for Singapore's chemical industry. In view of the evolution of Jurong Island, chemical warehouse can greatly benefit by providing logistics space solution to store dangerous and hazardous goods.

Figure 33: 33 & 35 Penjuru Lane Tenancy: Master lease Type: Chemical warehouse & logistics GFA: 286,192 sq ft NLA: 214,776 sq ft Value: S$78.9m Est. initial net property income (NPI) yield: 7.9% Tenants: 1 sub-tenant Source: Sabana REIT, Phillip Securities Research

Source: Sabana REIT Figure 34: 18 Gul Drive Tenancy: Master lease Type: Chemical warehouse & logistics GFA: 132,878 sq ft NLA: 116,781 sq ft Value: S$34.1m Est. initial net property income (NPI) yield: 7.9% Tenants: 1 sub-tenant Source: Sabana REIT, Phillip Securities Research

Source: Sabana REIT Figure 35: 1 Tuas Avenue 4 Tenancy: Master lease Type: Chemical warehouse & logistics GFA: 160,361 sq ft NLA: 120,340 sq ft Value: S$28.0m Est. initial net property income (NPI) yield: 7.5% Tenants: 1 sub-tenant Source: Sabana REIT, Phillip Securities Research

Source: Sabana REIT

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Sabana Shariah Compliant REIT

18 July 2011
Warehouse & logistics cluster Singapore was ranked second top logistics hub in the world by a 2010 World Bank report. This has to be attributed to the established world-class specialized infrastructure such as Airport Logistics Park of Singapore (ALPS) in the airports free-trade zone and the Changi International LogisPark that facilitates regional distribution. Besides that, Singapore also offers excellent global connectivity with its extensive network of logistics linkages. The sea-port is linked to 600 other ports in 123 countries via 200 shipping lines. Approximately 25 million TEUs of containers were exported out of Singapore in 2009. Sabanas portfolio of warehouses properties are well located to tap the flow of intermediate and finished goods in and out of Singapore as most of the warehouses are either near Pasir Panjang Terminal or ALPS and Changi International LogisPark. One thing to note is that proliferation of ramp-up warehouses would make conventional warehouse less attractive to some tenants who would rather prefer long-term cost savings and greater accessibility to have their vehicles parked at their doorstep.

Figure 36: 34 Penjuru Lane Tenancy: Master lease Type: Warehouse & logistics GFA: 414,270 sq ft NLA: 367,461 sq ft Value: S$60.0m Est. initial net property income (NPI) yield: 8.3% Tenants: 5 sub-tenants Source: Sabana REIT, Phillip Securities Research

Source: Sabana REIT Figure 37: 51 Penjuru Road Tenancy: Master lease Type: Warehouse & logistics GFA: 246,376 sq ft NLA: 212,275 sq ft Value: S$42.5m Est. initial net property income (NPI) yield: 7.8% Tenants: 1 sub-tenant Source: Sabana REIT, Phillip Securities Research

Source: Sabana REIT Figure 38: 26 Loyang Drive Tenancy: Master lease Type: Warehouse & logistics GFA: 149,166 sq ft NLA: 120,329 sq ft Value: S$32.0m Est. initial net property income (NPI) yield: 7.8% Tenants: 1 sub-tenant Source: Sabana REIT, Phillip Securities Research

Source: Sabana REIT

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Sabana Shariah Compliant REIT


Financial Review

18 July 2011
Stable and visible recurrent incomes Recurrent incomes generated from the income-producing properties are largely stable and predictable without much concern in the short term as the leases are contractually bound by both parties. Our revenue projection has priced in the rental escalation for each property in the portfolio by 1.5 to 2.0% per annum based on the lease agreements except for 151 Lorong Chuan, 200 Pandan Loop and 9 Tai Seng Drive. On the other hand, the rents for the remaining aforesaid properties are raised accordingly to our assumptions based on the industrial sector outlook. Since the Sabana REIT was listed on 26 November 2010, a small portion of revenue contribution in 2010 was recognized in 2011. Therefore, the top and bottom lines appear to be higher than 2012. With 14 out of the 15 properties are under the triple net master lease structure, rent, maintenance, land rent, property tax and insurance are borne by the master lessees. Property expenses are therefore minuscule and translated to high net property income. Six master leases will be expired in 2013 and assumed that the multi-tenanted master lessees have no plan to renew the leases and some of these properties may not attain 100% occupied status upon expiry. In such circumstances, revenue for 2013 is expected to be slightly lowered than 2012. The dip in revenue could then be averted when Sabana REIT acquires new properties and soften the portfolio vacancy. However, our model does not take into account of new acquisitions. Figure 39: Projected annual gross revenue, Net property income, Income available for distribution and DPU
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2011
Gross revenue (LHS) Income available for distribution (LHS)

S$'000

cents

9.60 9.40 9.20 9.00 8.80 8.60 8.40 8.20 8.00

2012

2013
Net property income (LHS) DPU (RHS)

Source: Phillip Securities Research Estimates Limited sources of Islamic debt financing in Singapore At present, Islamic finance is still at the early stage of development in Singapore as compared to Malaysia. Islamic debt financing is rather limited in Singapore and thus financing costs are slightly higher than other Singapore-listed conventional industrial REITs. The Monetary Authority of Singapore (MAS) pledged to introduce new income tax regulations for Islamic finance to ensure that Islamic financial products are not disadvantaged compared to their conventional counterparts during the second Asia summit of the World Islamic Banking Conference that was held in June 2011. In time to come, more banks will offer Islamic financing and make borrowing cost more attractive. This bodes well with Sabana REIT as there will be additional sources of Islamic funding to tap upon in the future. Refinancing of loan could be challenging depends on the interest environment in 2013 as the entire secured 3-year Commodity Murabaha Facility loan of $221 million is expected to mature at one go. Based on 34% gearing, Sabana REIT has $123 million of debt headroom to purchase new properties. The management is also in the process of pursuing a credit rating and would allow leverage up to 60%. However, the management is conservative and has set a medium to long term gearing target of 40%.

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Sabana Shariah Compliant REIT

18 July 2011
Finance expenses are well covered by the operating income or EBIT with FY2011-2013 interest coverage ratios to fall between 4.6 and 5.2. Figure 40: Loan maturity profile as at 31 March 2011
S$'000 250000 200000 150000 100000 50000 0 2011 2012 2013 2014 Secured 3-year Commodity Murabaha Facility 2015

Source: Sabana REIT, Phillip Securities Research Figure 41: Projected EBIT, Finance expenses, Interest coverage ratio
70,000 60,000 50,000 40,000 4.80 30,000 4.70 20,000 10,000 0 2011
EBIT

S$'000

cents

5.20 5.10 5.00 4.90

4.60 4.50 4.40 2012


Finance expenses

2013
Interest coverage ratio

Source: Phillip Securities Research Estimates

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Sabana Shariah Compliant REIT

18 July 2011
Porters 5 Forces To have a better grasp on the competitiveness of industrial REITs. Porters 5 Forces are used to understand the strategic position of Sabana REIT within its industry at both equity market level and product (industrial properties) offering level. Figure 42: Porters 5 Forces

Threat of new entry


Medium barriers to entry Shariah compliance and GCC standards required more stringent assessment Tax transparency and ample liquidity in the capital market support flotation of new REITs Established regulatory framework pave the path for REIT initiation Chemical warehouses are niche offering as they are highly specialized and regulated field

Competitive Rivalry in the industry Supplier power


Moderate Pipeline supply from sponsor is unappealing Supply is available from third parties but likely to be bought at a higher price Sponsor is not a full-fledged developer and may not have the adequate capability to provide built-to-suit facilities to bespoke clients other than purpose-built warehouses Strong Industrial REIT environment is quite saturated with six listed industrial REITs (excluding Sabana REIT) and big players like Ascendas REIT and Mapletree associated REITs New Shariah compliance REIT may compete for the pool of Islamic equity market share There is tendency for tenants to vacate out due to better and newer industrial buildings

Threat of substitutes
Moderate Listed business trust and developers may act as a proxy to have exposure in industrial property market Some industrial properties can be easily configured to suit the needs of tenants Unlike retail space, physical space cannot be substituted for industrial buildings Proactive asset enhancement initiatives can retain existing tenants and attract new tenants

Buying Power
Moderate Asymmetric information between buyer and seller (Bias towards landlord at product offering level) Balanced bargaining power Semi-tight vacancy in industrial market allows tenants to have some choices to relocate

Source: Phillip Securities Research

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Sabana Shariah Compliant REIT

18 July 2011
SWOT Analysis We also attempt to evaluate Sabana REIT by conducting a strategic environmental scanning on both internal (Strengths and Weaknesses) and external (Opportunities and Threats) aspects of the Trust. Table 7: SWOT Analysis Strengths Triple net master lease structures reduce income volatility Access to untapped Islamic equity market Diverse sub-tenant base across various trade sectors Ample debt headroom for new acquisitions Demonstrated the capability to purchase high quality buildings from third parties Leverage on sponsors chemical logistics experience Attractive and stable dividend yield Opportunities Potential revaluation surplus due to the buoyant industrial market Positive rental reversion when lease is due for renewal

Weaknesses Limited sources of debt funding Aggregate loan to expire in 2013 Lack of proven track records Pipeline of industrial properties from sponsor looks unappealing

Threats Possible interest rate hike in 2012 A Dubai Shariah compliant REIT could be listed this year Master lessees may not be renewed upon lease expiry Stiff competition may result in yield compression Uncertainties in global economies

Source: Phillip Securities Research

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Sabana Shariah Compliant REIT

18 July 2011
Peers Comparison Sabana REIT has a short weighted average lease term to expiry relative to other industrial REITs. Short term lease actually work to the advantage of Sabana REIT as industrial market is expected to perform well in the next years given no major external shocks. Early rental renewal will allow the rent to mark-to-market and result in positive rental reversion. In term of weighted average unexpired land tenure, Sabana REIT is placed ahead of Cache logistics but below or on par with the peers. Short tenure actually works against the benefit of Sabana REIT as lower tenure will affect the property value in long run. Cost of debt and gearing are both addressed under the financial review section above. Management fee comprises of base and performance fee as a percentage of distributable income is the least across the board within the industrial REITs. Base fee of 0.5% per annum of deposited property is similar amongst the peers. Performance fee is very competitive for Sabana REIT as the trust has set a high threshold (DPU growth > 10%) before entitled to the additional 0.5% of net property income (NPI). We believe Sabana REIT may find it difficult to achieve the performance fee in short and medium term and performance fee will only kick in 2012 as annualized DPU for 2011 is not available. This seemed to be the lowest performance fee across the industry standards. From the investor perspective, performance fee attached with a high hurdle rate may result in slightly higher and stable DPU as the management will be more selective on the basket of yield-accretive property assets to acquire and also potential saving on performance fee payable. On the flip side, the management may take a longer time to source for new properties. The breakdown of asset types is well diversified with hi-tech industrial took up the lions share. High concentration in hi-tech industrial and chemical warehousing & logistics segments differentiate Sabana REIT apart from its competitors. Investors who believe in Singapores petrochemical growth story, Sabana REIT could leverage on its strength to ride on the next phase of growth in petrochemical industry. Figure 43: Key company specific parameters across industrial REITs

1. 2. 3. 4.

As at listing date A-REIT is weighted by NLA; AMP Capital is weighted by land area Based on debt, net of transaction costs Updated as of 23 May 2011

Source: Sabana REIT, Bloomberg, Trust annual reports, Phillip Securities Research

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Sabana Shariah Compliant REIT

18 July 2011
Out of the seven Singapore-listed industrial REITs, three of them traded below its NAVPS. This could be explained by the backing of a strong sponsor with Mapletree Industrial Trust, Mapletree Logistics Trust and Ascendas REIT being associated with government-linked companies (GLCs). Based on the closing price of $0.935 as at 1 July 2011, Sabana REITs share price traded at a discount of 5.6% to its NAVPS. Cache Logistics Trust (CLT) which was listed last year and with its sponsor not associated with any GLCs can be a good comparable to assess how the investors perceived in relation to Sabana REIT. A historical price to book (P/B) ratio is plotted to make the study more meaningful. Barring Sabana REITs initial public offering sell-down phase, both P/B ratios tracked relatively close to one another. CLTs sponsor (CWT) pipeline supply is of good quality and is visible for acquisitions in near term which somewhat explained the gap between them. CLT made its maiden acquisitions in mid-March 2011 and another in June 2011 which are DPU accretive and thus the gap has seemed widen apart. We believe Sabana REIT is also on acquisitive mode with a purchasing power of $123 million and will then warrant a higher valuation after the acquisition. Table 8: Relative valuation comparison across industrial REITs

AIMS AMP Capital Industrial Trust Ascendas REIT Cache Logistics Trust Cambridge Industrial Trust Mapletree Industrial Trust Mapletree Logistics Trust Sabana Shari'ah Compliance Industrial REIT

Mkt. Cap. 485.55mil 4.31bil 623.25mil 594.60mil 1.73bil 2.27bil 592.9mil

NAV premium / Annualised Share NAV per discount to Dividend price ($) share ($) share price (%) P/B ratio Yield 0.220 0.270 -18.5 0.83 9.82% 2.070 1.760 17.6 1.17 6.32% 0.980 0.880 11.4 1.08 8.08% 0.500 0.600 -16.7 0.82 9.13% 1.180 0.860 37.2 1.36 6.54% 0.935 0.850 10.0 1.08 6.63% 0.935 0.990 -5.6 0.95 9.42%

*Information is based on the market closed as at 1 July 2011

Source: Bloomberg, SGX REIT Data, Phillip Securities Research Figure 44: Price to book ratio between Sabana REIT and Cache Logistics Trust
1.15 1.1 1.05 1 0.95 0.9 0.85 0.8 1/6/2011 2/3/2011 3/3/2011 12/9/2010 1/20/2011 2/17/2011 3/17/2011 3/31/2011 4/14/2011 4/28/2011 5/12/2011 5/26/2011 6/9/2011 11/25/2010 12/23/2010 6/23/2011 P/B ratio

Sabana REIT

Cache Logistics Trust

Source: Bloomberg, Phillip Securities Research

27

Sabana Shariah Compliant REIT

18 July 2011
Valuation Dividend discount model (DDM) is commonly used valuation method to ascertain the fair value of REITs as the distribution policy is clear and related to the earnings of the firm. In view of the short land tenure for industrial properties, we ascribe a 9.5% discount rate to Sabana REIT. We initiate coverage on Sabana REIT with a fair value of $1.11, representing a potential upside of ~29% with the inclusion of FY11 dividend yield of 10%. Sabana REIT has recovered some lose ground at the aftermath of 11 March incidence in Japan and the worries in global economies. NAV-based pricing model is another measure of intrinsic value of property related stocks like REIT and developers stock. The revaluation of properties this year is expected to increase owing to the buoyant industrial property market. We therefore opine that an increase in book value may act as a re-rating catalyst to the share price. With Sabana REIT set forth to cross $1 billion portfolio by the year end, further upsides through acquisition trail are expected in the 2H 2011 to drive up the share price. Future acquisition is not priced into the model. Figure 45: Sabana REIT trading price and FSTE Real Estate Investment Trusts Index
760 740 720 700 680 660 640 620 600 3/2/2011 5/3/2011 6/2/2011 1/10/2011 1/19/2011 1/28/2011 2/10/2011 2/21/2011 3/11/2011 3/22/2011 3/31/2011 4/11/2011 4/20/2011 5/12/2011 5/24/2011 6/13/2011 12/10/2010 12/21/2010 12/30/2010 6/22/2011 12/1/2010 7/1/2011 1.06 1.04 1.02 1 0.98 0.96 0.94 0.92 0.9

SSREIT (RHS)

FTSE ST REIT (LHS)

Source: Bloomberg, Phillip Securities Research

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Sabana Shariah Compliant REIT

18 July 2011

Financials
P ro f it m o de l ( S $ m ) 2 0 11E 2 0 12 E 69.4 (2.7) 66.6 (0.8) (4.5) (1 .0) (0.1 ) 60.2 0.1 (1 2.6) 47.7 0.0 0.0 47.7 0.0 47.7 54.9 2 0 13 E 68.9 (2.7) 66.2 (0.8) (4.5) (1 .0) (0.1 ) 59.7 0.1 (1 2.7) 47.1 0.0 0.0 47.1 0.0 47.1 54.4 B a la nc e s he e t ( S $ m ) Cash & equivalents Trade and o ther receivables To tal current assets Investment pro perties Other no n-current assets To tal no n-current assets To tal assets Trade and o ther payables Interest bearing bo rro wings Other current liabilities To tal current liabilities Interest bearing bo rro wings Other no n current liabilities To tal no n current liabilities To tal liabilities Net assets attributable to unitho lders 2 0 11E 46.5 0.7 47.2 845.9 4.1 850.0 897.2 1 7.2 0.0 0.0 1 7.2 21 7.4 1 5.2 232.6 249.8 647.4 2 0 12 E 44.8 0.7 45.6 845.9 3.1 849.0 894.5 1 7.2 0.0 0.0 1 7.2 21 9.6 1 5.2 234.8 252.0 642.5 2 0 13 E 44.2 0.7 44.9 845.9 2.0 847.9 892.9 1 7.2 0.0 0.0 1 7.2 221 .8 1 5.2 237.0 254.2 638.7 Gro ss revenue 74.3 P ro perty expenses (3.0) Net pro perty inco me 71 .3 Trust expenses (0.9) M anagement fees (4.8) A mo rtisatio n o f intangible asset (1 .0) Do natio n o f no n-shari'ah co mpliant inco me (0.1 ) EB IT 64.4 Interest inco me 0.1 Interest expenses (1 2.5) Net inco me 52.0 Net change in fair value o f financial derivatives 0.0 Net change in fair value o f pro perties 0.0 To tal return befo re tax and distributio ns 52.0 Inco me tax expense 0.0 To tal return after tax and befo re distributio ns 52.0 A vailable fo r distributio ns 59.6

To tal liabilities & equity

897.2

894.5

892.9

G ro wt h & m a rgins ( %) Revenue gro wth EB IT gro wth Net inco me gro wth EP S gro wth DPU gro wth Gro ss margin EB IT margin Distributio n margin

2 0 11E n.m. n.m. n.m. n.m. n.m. 96% 87% 80%

2 0 12 E -7% -7% -8% -8% -8% 96% 87% 79%

2 0 13 E -1 % -1 % -1 % -1 % -1 % 96% 87% 79%

P e r s ha re da t a EP S basic (cents) DP U (SG cents)) NA VP U (S$ )

2 0 11E 8.1 9 9.35 1 .02

2 0 12 E 7.50 8.63 1 .01

2 0 13 E 7.41 8.54 1 .00

C a s h f lo w s t a t e m e nt ( S $ m ) To tal return befo re tax and distributio ns Net (inc)/dec in wo rking capital Other o perating cashflo w Cash flo w fro m o peratio ns P urchase o f investment pro perties Others Cash flo w fro m investing activities Dividends paid Inc/(dec) in debt Co mmo n sto ck issuance (repurchase) Other financing cash flo ws Cash flo w fro m financing activities To tal cash flo w Cash & cash eq at beginning o f perio d Cash & cash eq at end o f perio d

2 0 11E 52.0 31 .7 1 7.3 1 00.9 (845.9) (5.0) (850.9) (44.7) 220.6 664.4 (43.8) 796.5 46.5 0.0 46.5

2 0 12 E 47.7 0.0 1 7.1 64.8 0.0 0.1 0.1 (56.1 ) 0.0 0.0 (1 0.4) (66.5) (1 .7) 46.5 44.8

2 0 13 E 47.1 0.0 1 7.2 64.3 0.0 0.1 0.1 (54.5) 0.0 0.0 (1 0.5) (65.0) (0.6) 44.8 44.2 Ke y ra t io s ROE (%) ROA (%) Debt/to tal assets Debt/equity Interest co verage (X) 2 0 11E 8.0% 5.8% 0.24 0.34 5.1 6 2 0 12 E 7.4% 5.3% 0.25 0.34 4.77 2 0 13 E 7.4% 5.3% 0.25 0.35 4.69

Va lua t io n P/E basic (X) P/B (X) Dividend yield (%)

2 0 11E 1 .41 1 0.92 1 0.00%

2 0 12 E 1 2.46 0.93 9.23%

2 0 13 E 1 2.61 0.93 9.1 3%

So urce: Co mpany, P hillip Securities Research

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Sabana Shariah Compliant REIT

18 July 2011

Ratings History
Sabana Shariah Compliance REIT
Rating
BUY

Date
18 July 2011

Closing price (S$)


0.935 TRADING BUY BUY HOLD SELL TRADING SELL

Fair value (S$)


1.11

Remarks
Initiate coverage

Phillip Research Stock Selection Systems

Share price may exceed 10% on the upside over the next 3 months, however longer-term outlook remains uncertain >15% upside from the current price -10% to 15% from the current price >10% downside from the current price Share price may exceed 10% on the downside over the next 3 months, however longer-term outlook remains uncertain

We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock's risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation

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Chan Wai Chee CEO, Research Special Opportunities +65 6531-1232 yebo@phillip.com.sg Go Choon Koay Bryan Investment Analyst Property +65 6531-1792 gock@phillip.com.sg Lee Kok Joo, CFA Head of Research S-chips, Strategy +65 6531-1685 leekj@phillip.com.sg Derrick Heng Investment Analyst Transportation +65 6531-1221 derrickhengch@phillip.com.sg Joshua Tan Strategy & Macro Singapore, US, China +65 6531-1249 joshuatan@phillip.com.sg Nicholas Low, CFA Investment Analyst Offshore & Marine +65 6531-1535 nicholaslowkc@phillip.com.sg Magdalene Choong Investment Analyst SG & US Financials, Gaming +65 6531-1791 magdalenechoongss@phillip.com.sg Travis Seah Investment Analyst REITs +65 6531 1229 travisseahhk@phillip.com.sg Phua Ming-weii Technical and Market Analyst +65 6531-1735 phuamw@phillip.com.sg

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